🥤 PEPSI vs COKE: LONG/SHORT STRATEGY 🥤

🥤 PEPSI vs COKE: LONG/SHORT STRATEGY 🥤

The Coca-Cola Company [KO] is engaged in the creation, concentrate production, marketing, and sale of non-alcoholic beverages—notably soft drinks, waters, juices, and teas—in more than 200 countries. PepsiCo [PEP] is engaged in the manufacturing, marketing, and mass distribution of beverages, snacks, and food products. It is one of the world's largest consumer goods companies and operates in more than 200 countries.

Insights:
- PER KO: ≈ 26.66 (21/07/26)
- PER PEP: ≈ 18.4 (21/07/26) 
- For the sample, for every unit of PEP, NO moves -0.233x times
- For the sample, for every unit of KO, PEP moves -0.919x times
- Based on the (5-year) sample, they have historically been more or less correlated. The de-correlation began in December 2024

Scenarios (Probability of Ocurrence):
A) Decoupling continues = 13.2%
B) Both rise, maintaining the ratio = 20.2%
C) Both fall, maintaining the same ratio = 20.2%
D) Mean reversion (decoupling breaks down) = 46.4%

Hypothesis
Although the mean reversion thesis is compelling, it does not offer an edge greater than 50%. Nevertheless, initiating a low-risk long/short strategy could be profitable for the next ≈12 months, given that the probability of the current trend persisting is lower than the probability of the price moving up or down—a scenario that would balance the open positions.
:::> It could be a moderate risk to take.

Hedge plan example:
- Long (call): $125 USD (PEP)
- Short (call): $90 USD (KO)

Risk
- Prices higher for short position
- Prices lower long position
- The mean reversion does not ocurr
- Roll over costs (if time is not well estimated)
- Not revaluation of strategy each 3 months


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J. Joel Padilla
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